Breach of Trust Receipt: Why a Deposit Isn’t Always Payment and Can Lead to Estafa Charges

TLDR: In the Philippines, simply depositing money intended for trust receipt obligations doesn’t automatically constitute payment, especially if a restructuring agreement isn’t finalized. Failing to properly account for goods or proceeds under a trust receipt can still lead to estafa charges, even with a deposit, as criminal liability isn’t easily extinguished by civil negotiations.

G.R. No. 134436, August 16, 2000
METROPOLITAN BANK AND TRUST COMPANY VS. JOAQUIN TONDA AND MA. CRISTINA TONDA

Imagine a business importing goods using bank financing secured by a trust receipt. When financial difficulties arise, they deposit a substantial sum, hoping it covers their debt and avoids legal trouble. But is a deposit enough to shield them from criminal charges if the bank pursues estafa? This scenario highlights the complexities of trust receipts and criminal liability in Philippine law, as illustrated in the case of Metropolitan Bank and Trust Company vs. Joaquin Tonda and Ma. Cristina Tonda. Understanding this case is crucial for businesses engaged in import-export and for banks extending credit through trust receipts.

The Legal Framework of Trust Receipts and Estafa

At the heart of this case is Presidential Decree No. 115, also known as the Trust Receipts Law. This law governs trust receipt transactions, which are commonly used in international trade finance. A trust receipt is a security agreement where a bank (the entruster) releases goods to a borrower (the entrustee) for sale or processing, but retains ownership until the loan is paid. The entrustee is obligated to either return the goods if unsold or remit the proceeds to the entruster.

The critical provision of P.D. 115, Section 13, states:

SEC. 13. Penalty Clause. – The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three Hundred and Fifteen, Paragraph One (b), of Act Numbered Three Thousand Eight Hundred and Fifteen, as amended, otherwise known as the Revised Penal Code.

This penalty clause links violations of the Trust Receipts Law to Article 315(1)(b) of the Revised Penal Code, which defines estafa (swindling) as:

b. By misappropriating or converting, to the prejudice of another, money, goods, or any other personal property received by the offender in trust or on commission, or for administration, or under any other obligation involving the duty to make delivery of or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying having received such money, goods, or other property.”

Essentially, failing to fulfill the obligations under a trust receipt – either returning the goods or the sales proceeds – can be considered criminal estafa. It’s important to note that estafa in this context is considered malum prohibitum, meaning the act is wrong because it is prohibited by law, regardless of intent to defraud. This distinction is crucial because even if there’s no malicious intent, a breach of the trust receipt agreement can still lead to criminal liability. Previous jurisprudence, like Vintola vs. IBAA, underscores that trust receipts are vital for commerce and their misuse undermines the financial system, justifying the imposition of criminal penalties to deter violations.

The Tonda Case: A Detailed Breakdown

The Tonda spouses, officers of Honey Tree Apparel Corporation (HTAC), secured commercial letters of credit from Metropolitan Bank and Trust Company (Metrobank) to import textile materials. To release these materials, they executed eleven trust receipts in favor of Metrobank, both in their corporate and personal capacities. When HTAC faced financial difficulties, they failed to settle their obligations upon maturity, despite demands from Metrobank.

Metrobank filed a criminal complaint for violation of the Trust Receipts Law and estafa. Initially, the Provincial Prosecutor dismissed the complaint, finding no probable cause for estafa. However, Metrobank appealed to the Department of Justice (DOJ), which reversed the prosecutor’s decision and ordered the filing of charges against the Tondas. The Tondas’ motions for reconsideration were denied by the DOJ.

Undeterred, the Tondas elevated the case to the Court of Appeals (CA) via a special civil action for certiorari. The CA sided with the Tondas, reversing the DOJ and dismissing the criminal complaint. The CA reasoned that the Tondas had deposited P2.8 million, intended to cover the principal amount of the trust receipts as part of a proposed loan restructuring. The CA argued that this deposit, coupled with ongoing restructuring negotiations, indicated that the Tondas had substantially complied and Metrobank hadn’t suffered damage. The CA highlighted:

• The Tondas proposed a loan restructuring and offered to immediately pay the principal of the trust receipts.
• They deposited P2.8 million and obtained a receipt from a Metrobank officer.
• Metrobank acknowledged the deposit in correspondence.

The CA concluded that Metrobank could apply the deposit to the trust receipt obligation, citing the principle of legal compensation. Crucially, the CA stated that Metrobank had “failed to show a prima facie case that the petitioners had violated the Trust Receipts Law.”

Metrobank then appealed to the Supreme Court (SC). The Supreme Court overturned the Court of Appeals’ decision and reinstated the DOJ’s order to file charges against the Tondas. The SC found that the CA had gravely erred in its interpretation of the facts and the law. The Supreme Court’s key arguments were:

1. Deposit vs. Payment: The P2.8 million was deposited into a joint account, not directly paid to Metrobank for the trust receipts. It was intended as payment *contingent* on a finalized restructuring agreement, which never materialized. As the SC pointed out, “The alleged payment of the trust receipts accounts never became effectual on account of the failure of the parties to finalize a loan restructuring arrangement.”
2. No Legal Compensation: The SC clarified that legal compensation (set-off) is not applicable when one debt arises from a penal offense. Article 1288 of the Civil Code explicitly prohibits compensation in such cases.
3. Negotiations Irrelevant to Criminal Liability: Negotiations for settlement affect only civil liability, not the pre-existing criminal liability for violating the Trust Receipts Law. As the Court quoted, “Any compromise relating to the civil liability arising from an offense does not automatically terminate the criminal proceeding against or extinguish the criminal liability of the malefactor.”
4. Damage to Public Interest: The SC reiterated that violations of the Trust Receipts Law are not just private offenses but affect public order and the banking system. Damage arises from the breach of trust receipt obligations itself, even if the bank holds a deposit.

Ultimately, the Supreme Court emphasized the prosecutor’s role in preliminary investigations and the limited scope of judicial review. Courts should only intervene if there is grave abuse of discretion, which was not found in the DOJ’s decision to proceed with the estafa charges.

Practical Implications and Key Takeaways

The Tonda case provides critical lessons for businesses and banks involved in trust receipt transactions. For businesses acting as entrustees, the case underscores that:

• Deposits are not automatic payments: Simply depositing funds, even if intended for trust receipt obligations, does not automatically discharge the debt, especially if conditions are attached, like a restructuring agreement. Payment must be clear, unconditional, and accepted as such by the entruster.
• Restructuring negotiations don’t erase criminal liability: While attempting to restructure loans is prudent, it doesn’t negate potential criminal liability under the Trust Receipts Law if obligations are not met. Criminal liability is separate from civil negotiations.
• Compliance is paramount: Strict adherence to the terms of trust receipt agreements is essential. Entrustees must diligently account for goods or proceeds and remit payments promptly to avoid criminal charges.

For banks acting as entrusters, this case reinforces:

• Criminal prosecution as a recourse: Banks can pursue criminal charges for estafa under the Trust Receipts Law even while engaging in civil negotiations or holding deposits, especially when there’s a clear breach of trust receipt obligations.
• Importance of clear documentation: Maintaining clear and unambiguous documentation of trust receipt agreements, demands for payment, and the nature of any deposits is crucial for successful legal action.

Key Lessons from the Tonda Case

• Understand Trust Receipt Obligations: Businesses using trust receipts must fully understand their obligations to account for goods or proceeds and remit payment.
• Ensure Clear Payment Terms: When making payments intended for trust receipts, ensure they are clearly designated as such and unconditionally accepted by the bank. Avoid conditional deposits linked to restructuring agreements that are not yet finalized.
• Separate Civil and Criminal Liability: Recognize that civil negotiations or partial payments do not automatically extinguish criminal liability for trust receipt violations.
• Seek Legal Counsel: If facing financial difficulties or trust receipt issues, seek legal advice immediately to navigate potential criminal and civil liabilities.

Frequently Asked Questions (FAQs) about Trust Receipts and Estafa

Q1: What is a trust receipt?

A: A trust receipt is a legal document where a bank releases goods to a borrower for sale or processing, while the bank retains ownership until the borrower pays the loan secured by the goods. It’s commonly used in import financing.

Q2: What are the obligations of an entrustee under a trust receipt?

A: The entrustee is obligated to either return the goods if unsold or remit the proceeds from the sale to the entruster (bank).

Q3: Can I be charged with estafa for failing to pay a trust receipt?

A: Yes, under the Trust Receipts Law (P.D. 115), failure to account for goods or proceeds can lead to estafa charges under Article 315(1)(b) of the Revised Penal Code.

Q4: Is depositing money enough to avoid estafa charges in a trust receipt case?

A: Not necessarily. As illustrated in the Tonda case, a deposit intended for trust receipt obligations might not be considered full payment, especially if it’s conditional or part of an unfinalized restructuring agreement. Criminal liability may still arise.

Q5: What is the difference between civil and criminal liability in trust receipt violations?

A: Civil liability pertains to the debt owed to the bank, which can be settled through payment or negotiation. Criminal liability arises from the violation of the Trust Receipts Law, which is considered a crime against public order and is pursued by the state. Settling the civil debt doesn’t automatically extinguish criminal liability.

Q6: What should I do if I anticipate difficulty in fulfilling my trust receipt obligations?

A: Communicate with the bank immediately, explore restructuring options, and most importantly, seek legal counsel to understand your rights and obligations and mitigate potential criminal liability.

Q7: Does intent to defraud matter in trust receipt estafa cases?

A: No, estafa under the Trust Receipts Law is considered malum prohibitum. This means the crime is the act itself (failure to fulfill trust receipt obligations), regardless of whether there was intent to defraud.

Q8: Can a bank pursue both civil and criminal actions for trust receipt violations?

A: Yes, a bank can pursue both civil actions to recover the debt and criminal actions to prosecute for estafa.

ASG Law specializes in banking and finance litigation and criminal defense. Contact us or email hello@asglawpartners.com to schedule a consultation.